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PFHO dividend – I was very surprised when I read the news of PFHO’s $1.25 dividend, and the suspension of the buyback. I am wondering what the rationale was, if anyone has any guesses.
Being that PFHO’s share price is at multi-year lows and very cheap by most valuation standards, it seems it would have made much more sense from a capital allocation standpoint to buy back more shares, more aggressively than they had been doing. Instead they chose a different route, and decided to pay a dividend, which is a less tax-efficient means of returning capital to shareholders.
Here is my theory on this:
I know that the CEO has been a regular purchaser of the shares over time. I am wondering if he will use his portion of the dividends in order to purchase more shares, while giving other shareholders the option to do so with their portion of the proceeds. Perhaps because the share price has sunk so low, the tax issue is less of a consideration? I suppose time will tell regarding this.
Anyone have any other thoughts / theories?
SRMC – Things I like
First I want to say I really enjoy reading this board – its one of the few worthy places to read when looking at stock ideas. I learned of Biosyent here back when it was still in the low $1s, which I am very happy about. So from time to time I’d like to share my own research to reciprocate.
So today I’ll post my first one, it is SRMC (Sierra Monitor Corp). I’ve been accumulating shares in it over the past year in the $1.50 - $1.65 range. In a brief synopsis of what I like (and dislike) about it:
Things I like:
1. No long-term debt on its balance sheet
2. Approximately $4 Million in cash, with a market cap of around $15 Million. When subtracting out the cash, you are paying $11 Million for the business – which did nearly $20 Mil in Revenue in 2014 and is profitable (my guess is, though could be wrong, net earnings will likely be over $800,000 this year).
Company is investing in its growth, which is making earnings lower. As a result, I don’t think it’s appropriate to value this company purely on a multiple of current earnings. In the long run, I think their continued investment in growth will lead to increased earnings power.
3. Company has a long history of growing revenues and profitability. You can view a generalized breakdown here:
http://www.gurufocus.com/financials/SRMC
historically, their business has grown by around 10% per year over the past 10 years. I am anticipating this rate of growth to accelerate (based on #4).
During the financial crisis, they weathered the storm well
4. They recently put into place a new CEO and director of Sales, both who have very good backgrounds. After a couple flat quarters, the past 2 quarters have seen both accelerated growth as well as increase of profitability. Last quarter their revenues grew by about 20%. So it looks like their investment in new management is beginning to pay off.
http://finance.yahoo.com/news/sierra-monitor-corporation-announces-financial-191933898.html
6. Clean capital structure
7. I like the fact that in their press releases, they provide lots of details of the various projects / contracts they are working on. They have an impressive roster of clients that seems to span all industries and sectors of the economy.
8. Company currently pays a dividend of $0.01 a quarter. At a share price of $1.50, this equates to 2.6% yield.
9. Its biggest shareholder is Richard Kramlich, who has also been on the board since 1980. His background is quite impressive:
http://www.investor.sierramonitor.com/committees.cfm
Things I dislike
1. Low liquidity
2. My understanding of the technology/risks posed from potential competitors is not as high as it should be. Based on their history and backgrounds, as well as the quality and volume of the current order flow, I am not as concerned about this. But it is a risk - one that someone may wish to study more in depth.
A friend of mine who has an engineering / computer science background took a quick look into this (not in depth by any means). He told me he thought the risk of technological obsolescence in the near future is small, and that this specific area tends to be slow moving and subject to a lot more regulation than say, consumer products. Nonetheless – I would imagine as with anything technology related, this could be a risk. Or the inverse may be true – and the company may innovate its way towards accelerated sales in the future. Time will tell.
This is an overview of the business
http://www.sierramonitor.com/assets/blta38f1dac21e2dc2e/smc-presentation-corporate-overview-2015.pdf
3. While I really like the conservative financial management of the company, I would hope that as profits continue to grow – if the share price remains cheap, that the company would take a small portion of its earnings to buy back shares. But, this should not come at the expense of investment in the business as well as maintaining a sound fortress-like balance sheet to protect from the unknowns.
If anyone has any comments I’d be interested to hear what you have to say.
Overall I thought the last report was quite good. Cash flow from operating activities increased significantly, from $591,928 in 2013 to $1,156,041 in 2014.
Cash on the balance sheet seems to have grown to a healthier level, and the company has made a good dent in paying down its debt.
As for earnings, I copy and pasted below what appears to have caused the dip. In and of itself I don’t think is a huge issue, however – the company should be careful when making acquisitions that they turn out to be profitable for shareholders.
Setting aside the above, I think they will continue chugging along, though not sure how much long term growth can be squeezed out of the heliport.
The biggest risk I see is if a group such as http://www.stopthechopnynj.org/ manages to convince the NYC mayor to either limit or shut down the tourist choppers. I don’t think the current mayor would do that, but it’s always a possibility in the future. Currently I think this poses an existential risk for the company, which would explain why up until recently the price was so cheap.
That is why I hope the company continues to pay down its debts, build up cash, and hopefully diversify itself later into profitable operations elsewhere - which will ensure its ongoing future regardless of which way the political winds blow.
I think this may explain the lower earnings in Q4:
Impairment of Goodwill and Other Intangibles
The Company had $530,000 and $1,080,380 of goodwill at December 31, 2014 and 2013, respectively. The Company assessed its goodwill using the qualitative approach and determined it was more likely than not that the fair value of its goodwill resulting from the purchase of PRA was less than its carrying value and recorded a $550,380 impairment charge at December 31, 2014. Due to macroeconomic, industry and market conditions, the PRA facility has not been able to establish positive cash flow and that future cash flows were insufficient to support any value of goodwill or indefinite live intangibles and has taken an impairment charge in the audited financial statements for their remaining value.
I think its all a matter of perspective. Here you have a growing small business, that is able to amass cash on its balance sheet with no debt. That in and of itself I would consider to be a great feat compared to most listed companies, and in particular those in the nano/micro cap space.
In terms of the details and the possibility of slower growth in the future, success is never linear. Every small business will have its issues as it grows. What is important is the big picture. Personally I think getting from $0 to a nearly $9.5 Million revenue company with no long term debt is much more challenging than going from $9.5 Million to numbers beyond, unless you believe the fundamental momentum behind the business has shifted and the model will be short-lived.
With that said, not all investors think alike. Some don’t really care so much about fundamental factors (profitable, decent growth, no debt, clean capital structure, high insider ownership, etc.), but rather give more heavy weight to hair-trigger sentiments of fear. That is the beauty of markets, we are all entitled to our own views, and in the long run reality will play itself out.
Millions of people have benefited from Herbalife’s products and use them regularly (just do an amazon search and you will find many high reviews of their products).
Obesity is the biggest health issue facing this country, and its great to see a company that can generate so much enthusiasm among its customers to embrace a more healthy lifestyle.
Not sure why you would want to see it shut down, people lose their jobs, and consumers unable to buy the products they enjoy and derive benefit from? All because you don’t like Icahn’s style? Seems rather superficial and mean-spirited to me.
I’ve been long on this company since it went public, and remain so today. Given that Herbalife’s revenues are driven by actual product sales, combined with a return policy for those who are unable to sell products – I seriously doubt it is running afoul of the law.
With that being said, I think there ought to be some kind of law against what Ackman is doing. To go short a company with his investors’ money to the tune of $1 Billion, and then try to destroy that company through manipulation of the political system and distortions of facts, all in the name of some strange and twisted form of altruism I find to be completely disingenuous at best.
And unlike Ackman who has taken his position using his “investors” money, Icahn is using his own money.
I read through some of the filings on AUXO last night. What they have accomplished looks very impressive.
One concern I have, is that it looks like they have over 8 million stock options outstanding. Does this seem a little excessive, being that it represents nearly 40% of all the shares outstanding?
The good news is, that the longs don’t have to be right in order for Ackman to be wrong. Ackman has professed the price will be 0, which is an exceptionally bold statement that implies the ultimate God-like perfection in his analysis.
In order for Ackman to be proven correct, not only would Herbalife need to be shut down in the USA, but in every other country it does business. Seems like a very tall order.
As for flaws within Herbalife’s business – I would agree that some exist, as every business has its issues. Perhaps the greatest that I can see, is how they can adequately police tens of thousands of distributors – a percentage of whom are going to misrepresent the product and do bad things.
With that being said, I’d argue that there are many mainstream businesses whose issues are far worse. Such as banks whose sales reps misrepresent the financial products they are offering, all to earn higher commissions. Or food companies that chemically make their products more addictive in order to achieve higher sales. I can go on and on. Many companies and industries have flaws, but I don’t think anyone is arguing that their intrinsic value is 0 due to these flaws, and nor would I expect the government to shut them down (perhaps a fine or a slap on the wrist at worst, but even that is too seldom).
With regards to peoples desire for and the merits of Herbalife products, I think all one needs to do is to go to Amazon.com and type in “Herbalife Formula 1”, and you will read lots of good reviews. When you have lots of people who like a product and desire to purchase it, that is a good sign that a market exists.
Will there be some who dislike the product? Absolutely. But that doesn’t change the fact that a market of happy consumers does exist.
As for distributor churn, I think this issue is overblown as well. Statistically, most people who try to make their living at MLM will not succeed. Just as the failure rate for small business in general are very high. It is the ones who succeed who will produce the sales, just as it is the businesses that succeed that propel our economy forward. The 80/20, 90/10 rule applies to many things in life.
Regarding the future of Herbalife’s revenues and earnings, I am sure that inevitably the rates of growth will decline at some point. They do have very good momentum at this point in time, and how long they can grow at the current rates is anyone's guess.
I do think it is unlikely that sales/earnings will actually decline and more so to the point where the company’s value will be driven to 0. Not likely over the next 10 - 20 years, IMO.
I’d be careful on that one. I’ve been long HLF since around when it first went public and added more to my position during the financial crisis. I’ve been following the company for over the past decade. I have yet to sell my shares, as I have yet to see a reason for doing so.
Having used the products myself, I believe the economic proposition HLF creates for consumers is a sound one. The meal replacements both save people money and foster a healthier lifestyle. These are both things this country needs more of.
Regarding Ackman’s presentation, I read through it entirely when it first came out. Having already been quite familiar with the company, I was quickly able to see that his presentation was riddled with fudged facts in attempt to “prove” his point.
Here is an example of this:
I recall in one of the pages, he argues that Herbalife’s Formula One is much more expensive than other meal replacements. He breaks this down by cost per 100 calorie serving to make his point.
On the surface, his argument may look reasonable. However, when it comes to calories per serving, this varies depending on company/product, and is certainly not the only metric that determines nutritional value. Formula One has a lower calorie per serving compared to the other products he listed. Yet, in terms of “per serving” prices – the prices are very comparable.
So essentially Ackman took an apples-to-apples measurement, and makes it into an apples-to-oranges measurement, in attempt to prove his point.
This one example alone should say something about the intellectual integrity of his presentation. It seems to me that this is a case of someone going into a research study with his mind made up as to the outcome. Obviously those he employs to do his “research” are going to come up with arguments and a conclusion that makes their boss happy and would seem reasonable to the layperson, regardless of its connection to reality.
Congratulations!!!!!
Congratulations with the 300% return!
I wonder why you sold all of PBSV?
Here is my view of it:
The stock price still looks very cheap, nearly 1/3 of the market cap is cash, with practically no debt. When backing out the cash, the company is being sold for around 5x earnings. Even if there was 0 growth in the business, I think the shares at the current price would still produce an adequate rate of return. Its management has proven itself to be both highly competent and financially conservative, so the odds of them going broke I think are extremely low.
With the above having been said, I think this stock could double over the next few years as cash continues to pile up and if earnings continue to chug along.
The biggest risk I see at the moment is the fact that Puerto Rico has some very serious budget issues, and not sure if this could impact the business in terms of its favorable tax treatment, etc.
I am wondering what prompted your decision to sell off all your shares? Do you see some fundamental change in their business going on?